Deck 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange Rates

Question 1

The United States has a trade problem with China because the U.S.trade deficit with China:

A)is very large
B)has increased very much during the past decade
C)did not decline when the dollar depreciated with respect to the yuan or renminbi
D)all of the above

Answer 1

D

Question 2

The mint parity refers to the:

A)gold export point
B)gold import point
C)equilibrium exchange rate
D)ratio of the price of a unit of gold in terms of the currency of two nations

Answer 2

D

Question 3

A nation's demand curve for foreign exchange is derived from the:

A)foreign demand curve for the nations' exports
B)nation's supply curve of exports
C)domestic demand curve for imports and the foreign supply curve for the nation's imports
D)foreign demand curve and the domestic supply curve for the nation's exports

Answer 3

C

Question 4

The foreign exchange market is stable when:

A)The demand curve of foreign exchange is negatively inclined and the supply curve of foreign exchange is positively inclined
B)the supply curve of foreign exchange is negatively inclined and less elastic than the demand curve
C)the sum of the absolute values of the elasticity of the nation's demand of imports and the foreign demand for the nation's exports is greater than one
D)all of the above

Question 5

When a nation's demand curve for imports in terms of the foreign currency is vertical:

A)the nation's demand curve for the foreign currency has zero elasticity
B)the nation's demand for the currency is elastic
C)the nation's supply of the currency is vertical
D)the other nation's demand for the nation's currency has zero elasticity

Question 6

When a nation's demand curve for exports in terms of the foreign currency is inelastic:

A)the nation's supply curve of the foreign currency is negatively inclined
B)the nation's supply curve of the foreign currency is vertical
C)the nation's demand curve for the foreign currency is negatively inclined
D)the other nation's supply curve of the nation's currency is negatively inclined

Question 7

A depreciation of a nation's currency is:

A)inflationary for the nation
B)deflationary for the nation
C)deflationary for the trade partner
D)any of the above

Question 8

A depreciation of a nation's currency shifts:

A)down its supply curve of imports in terms of the foreign currency
B)up its demand curve of imports in terms of the foreign currency
C)down its demand curve of imports in terms of the foreign currency
D)down its demand curve of imports in terms of the domestic currency

Question 9

A depreciation of a nation's currency shifts:

A)down its supply curve of exports in terms of the domestic currency
B)down its supply curve of exports in terms of the foreign currency
C)down its demand curve for exports in terms of the foreign currency
D)up its supply curve of imports in terms of the foreign currency

Question 10

A depreciation of the nation's currency causes its terms of trade to:

A)deteriorate
B)improve
C)remain unchanged
D)any of the above

Question 11

A currency board refers to the case where:

A)the central bank sterilizes changes in the money supply resulting from balance of payments disequilibria
B)the money supply of the nation is backed by 100 percent international reserves
C)the nation operates under flexible exchange rates
D)the nation retains firm control over its money supply

Question 12

Which of the following statements is not true with regard to the price-specie-flow mechanism:

A)relies on the quantity theory of money
B)requires that nations allow their money supply to rise when the nation has a surplus in its balance of payments and to fall when the nation has a deficit
C)requires that the price elasticity of demand for imports and exports be equal to zero
D)it was introduced by David Hume to show the futility of the mercantilists' prescription

Question 13

Under the gold standard:

A)each nations defines the price of gold in terms of its currency and then stands ready to buy and sell any amount of gold at that price
B)there is a fixed relationship between any two currencies called the mint parity
C)the exchange rate is determined by demand and supply between the gold points and is prevented from moving outside the gold points by gold shipments
D)all of the above

Question 14

For a small nation:

A)the foreign supply of exports is horizontal
B)the domestic demand for imports is horizontal
C)the foreign demand for its exports is horizontal
D)the foreign supply of exports is vertical

Question 15

The more elastic is a nation's demand and supply of foreign exchange the:

A)larger is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance of payments
B)smaller is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance of payments
C)less feasible is a flexible exchange rate system
D)less feasible is a devaluation as a policy to correct a deficit in the nation's balance of